IndusInd Bank: A Future HDFC Bank or a YES Bank in the Making?

What Exactly Happened?

IndusInd Bank’s stock price plummeted over 27% in a single day, marking its biggest fall since listing. This was due to a major issue related to a forex (foreign exchange) transaction and how the bank accounted for it. IndusInd Bank holds a lot of forex deposits. To hedge against this risk, the company entered into Swap transaction with its internal desk, which then hedged the swaps externally to manage the risk. However, there was a flaw:

1) The external trades were marked to market (value based on current market price)

2) But the internal trades were not.

This is where it created a mismatch of accounts, especially when deposits were withdrawn early, leading to unaccounted losses over time.

This went unnoticed for 5-7 years, resulting in the financial impact of over ₹1,577 crores (~2.35% of Bank’s Net-worth as of December 24).

In September 2023, RBI issued new guidelines on investments and derivatives. Following this, IndusInd Bank stopped recording these internal trades and recognised the losses.

Why did the stock fall so much?

1) The bank has provided an estimated loss figure, but the external auditor is yet to confirm the actual figures.

2) Investor sentiment states that real impact could be higher than expected.

3) The Chief Financial Officer (CFO) resigned just before Q3 results.

4) The CEO, Sumant Kathpalia, received only 1-year extension while the board has sought for 3 years.

The Bank’s delay in disclosing this issue raised doubts about the internal controls.

This is not the first time a private bank has faced financial trouble. YES Bank, Laxmi Vilas Bank, DHFL and PMC Bank all suffered due to poor governance and financial affairs.

What’s Next?

Despite a fall of over 27% on Tuesday, the stock rebounded slightly to ₹685 the next day from ₹655.95. The key focus would be the auditor’s conclusion and whether RBI steps in with further regulatory compliances. Investor’s will watch management future actions to determine further market sentiments.

Final Thoughts

A 27% fall in one day shows how sensitive the market is to trust and governance issues in banking sector. While the bank may remain financially stable, the way it handled this situation raises red flag on the management of the bank. Until there is a proper clarity, market confidence may take time to recover

Recent News on Induslnd Bank

RBI on Induslnd Bank

• No need for depositors to react to speculative reports

• IndusInd Bank is well capitalised, financial position remains satisfactory

• Bank has already engaged an external audit team

• RBI has directed board and management to have remedial action completed in Q4

• Bank's financial health remains stable and is being monitored by RBI

Source : Click here