Explained: Why IndusInd Bank Shares Fall 25%?

Indian equity markets remained weak for the major part of the day on March 11 amid persistent FII outflows and concerns over U.S. tariffs. The atmosphere became even murkier when shares of IndusInd Bank hit the lower circuit. However, the day ended with minor gains as Nifty ended at 22,497.90, up 0.17%. Meanwhile, Sensex fell by 0.017% to end at 74,102.32.

IndusInd Bank shares crashed by 25% on March 11, thereby hitting a 52-week low of ₹674.55. The decline came after the banking major disclosed discrepancies in its derivatives accounting, leaving investors and analysts fumed. This is the sharpest fall in IndusInd Bank’s share since March 2020.

Analysts have further raised doubts on the stock citing weak internal controls and poor earnings. Let’s try to understand in detail about the reasons behind the fall.

What happened?

IndusInd Bank reported accounting discrepancies in its derivatives portfolio. This led to a crash of 20% in its share price. As per an internal review, the bank had underestimated hedging costs related to past forex transactions. This revelation has the potential to wipe out its net worth between ₹1,600-2,000 crore, which equals to 2.35%.

Following these reports, the bank’s shares have hit their lowest levels since March 2020.

Who remains affected?

The bank’s promoters as well as investors faced the biggest impact. The stock has fallen by 42% in the past year. The current findings have raised concerns about the bank’s internal controls and compliance measures.

How did the problem emerge?

The discrepancies were brought to light between September and October 2024, following the Reserve Bank of India’s (RBI) updated master directions on derivatives. IndusInd Bank disclosed the issue in its exchange filing on March 10 after a board meeting.

Additionally, the stock ended 4% lower on March 10 after RBI’s decision to extend the incumbent CEO's term by just one year against the standard three years.

How did stock markets react?

The banking sector reported minor corrections. Nifty Bank index fell 0.7%, while the broader Nifty 50 declined by 0.27%. The issue can also shake investor confidence in banking stocks.

Why did IndusInd Bank face this issue?

The discrepancies are related to past forex transactions where the bank underestimated hedging costs. This has led to incorrect valuation in its accounts. Notably, the issue is linked to compliance with RBI's new guidelines on derivatives portfolio management.

What do brokerages have to say?

Analysts have noted that it may face further downgrades over concerns of weak internal controls. Emkay Global has downgraded IndusInd Bank to ‘Add’ from ‘Buy’ by slashing the target price by 22% to ₹875. Nuvama downgraded the stock to ‘Reduce’ from ‘Hold’ and cut its target price to ₹750.

What did the management say?

The bank launched a detailed internal review and appointed an external agency to validate its findings. Its profitability and capital adequacy will remain strong enough to wean off one-time impact. The loss will either be accounted in Q4 FY25 or Q1 FY26.