Concerns for IndusInd Bank will subside if it delivers numbers over next 4-6 quarters: CLSA

IndusInd Bank is grappling with concerns over management continuity and financial discrepancies. The bank recently said that its net worth could be impacted by 2.35% due to discrepancies in its derivative accounts found during an internal review. These issues arose from derivative trades that did not comply with Reserve Bank of India (RBI) regulations enforced in April 2024.

This development came after RBI’s decision to grant a shorter-than-expected tenure extension to CEO Sumant Kathpalia, which contributed to the stock’s sharp decline.

Following these revelations, IndusInd Bank’s shares plummeted by as much as 27% on Tuesday but managed to recover some losses, rising 4.38% on Wednesday.

However, the leading capital markets and investment group CLSA believes these issues could subside if the bank delivers numbers over the next 4-6 quarters. CLSA cautioned that uncertainties may persist over the next 2-3 quarters, particularly regarding potential hidden financial risks and leadership changes.

One of the major red flags highlighted by CLSA is the potential appointment of a state-run banker to lead IndusInd Bank, which could further dampen investor sentiment. Additionally, the possible invocation of the promoter’s stock pledge by lenders adds another layer of uncertainty.

Drawing parallels from the past events at RBL Bank and Yes Bank, CLSA noted that when the RBI granted a one-year extension to RBL Bank’s MD before appointing a PSU banker, the stock crashed by 60%. However, in the following quarters, no major financial irregularities were found, leading to a recovery. Similarly, Yes Bank saw a temporary dip following a CEO’s exit but rebounded after reporting no divergence in gross non-performing assets (GNPA). CLSA expects IndusInd Bank’s stock to follow a comparable trajectory.

Silver lining for IndusInd Bank

Despite the near-term challenges, CLSA identified two potential positive factors for IndusInd Bank. The recovery in the microfinance segment is showing signs of improvement, providing some financial relief. Improved banking system liquidity and rate cuts could also offer a marginal boost to net interest margins.

Additionally, CLSA believes a non-fundamental upside could come from the RBI approving the promoter’s request to increase its stake in the bank after completing Reliance Capital’s acquisition. Such a move would likely bolster investor confidence.

CLSA has cut the bank’s FY25 net profit estimates by 25%, citing a one-time extraordinary loss linked to derivative portfolio discrepancies. Loan growth estimates have also been trimmed by 2% for the next two years, as the bank is expected to focus on resolving its ongoing issues. Moreover, CLSA has slightly increased its credit cost estimates for FY26, factoring in microfinance collection challenges in Karnataka.

CLSA added that stability in financial performance over the next 4-6 quarters could help restore confidence. Investors will be closely watching management decisions, regulatory developments, and operational performance to gauge the bank’s recovery trajectory.

On Thursday, March 13, IndusInd Bank’s shares traded 0.28% lower at ₹682.80, underperforming the NIFTY50 index, which was down 0.12% by 12:16 pm.