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IndusInd Bank, a prominent private sector lender in India, has issued a cautionary statement regarding potential losses stemming from its derivatives portfolio. The bank, in a filing made public on March 10th, disclosed that an internal investigation into its derivative holdings had revealed a possible adverse impact of 2.35% on its net worth. This translates to a potential hit of approximately Rs 1,500 crore on the bank's profitability, according to sources familiar with the matter. The exact figure, however, remains subject to change pending the outcome of an independent external review, which is currently in progress. The CEO and managing director of IndusInd Bank, Sumant Kathpalia, addressed analysts in a call, indicating that the potential loss would likely need to be absorbed through the profit and loss (P&L) statement, as general reserves are typically not accessible for such adjustments. Kathpalia attributed the anticipated losses to derivative instruments employed by the bank to manage its foreign currency exposure, which arises from international deposits and borrowings. These hedging instruments are managed by the balance sheet management desk, which also oversees the bank's asset-liability mismatch (ALM) management. The bank's disclosure of the potential losses has understandably raised concerns among investors and market observers, prompting a closer examination of IndusInd Bank's risk management practices and the implications for its future financial performance. The magnitude of the potential losses, while significant, is being assessed in the context of the bank's overall financial health and capital adequacy, which the management has asserted remains robust enough to withstand this one-time impact.
The internal review that unearthed the potential derivative losses was initiated in response to directives issued by the Reserve Bank of India (RBI) in September 2023. These directives focused on the investment portfolios of lenders, specifically addressing ‘Other Asset and Other Liability’ accounts. IndusInd Bank acknowledged that it had identified certain discrepancies within these account balances, although the specific procedures employed to uncover these discrepancies were not disclosed during the investor call. In its official statement, IndusInd Bank stated that its internal review estimated an adverse impact of approximately 2.35% of the bank's net worth as of December 2024. To ensure the objectivity and accuracy of these findings, the bank has engaged a reputable external agency to conduct an independent review and validation of the internal assessment. The final report from this external agency is eagerly awaited, as it will play a crucial role in determining the ultimate impact on the bank's financial statements. Despite the uncertainty surrounding the final figures, IndusInd Bank has sought to reassure investors that its profitability and capital adequacy are sufficient to absorb this one-time financial setback. This assurance is crucial in maintaining investor confidence and preventing further erosion of the bank's stock price. The management anticipates that the external agency review will be completed by the fourth quarter of the current financial year.
In response to the identified issues with internal trades, IndusInd Bank has taken steps to enhance its risk management practices and ensure greater transparency in its hedging activities. The management has stated that the bank will now exclusively engage in external trades with market counterparties to hedge its entire balance sheet. This shift away from internal trades is intended to mitigate the risks associated with potential conflicts of interest and ensure that hedging activities are conducted at fair market valuations. Furthermore, the bank has confirmed that, effective April 1st, it will no longer engage in any internal trades within its book. The internal trades that were in place prior to this period have been unwound in accordance with mark-to-market valuations, ensuring that any losses or gains are appropriately reflected in the bank's financial statements. The bank's proactive measures to address the issues identified in its derivative portfolio have been viewed positively by some analysts, who believe that these steps will help to restore investor confidence and strengthen the bank's long-term financial stability. However, the extent of the impact on the bank's profitability and net worth will ultimately depend on the findings of the external review and the bank's ability to effectively manage its risk exposures in the future.
The disclosure of the potential derivative losses has had a noticeable impact on IndusInd Bank's stock price. On the NSE, the bank's shares fell by 4% to Rs 900.50 following the announcement. Over the past month, the stock has experienced a decline of nearly 16%, reflecting investor concerns about the bank's financial performance and risk management practices. The market reaction underscores the importance of transparency and effective communication in managing investor expectations and maintaining market confidence. IndusInd Bank's management team faces the challenge of not only resolving the issues within its derivative portfolio but also rebuilding investor trust and demonstrating its commitment to sound risk management practices. The outcome of the external review, the bank's ability to effectively manage its hedging activities, and its overall financial performance in the coming quarters will be closely watched by investors and analysts alike. The situation at IndusInd Bank highlights the complexities of managing derivative portfolios and the potential risks that these instruments can pose to financial institutions. It also underscores the importance of robust internal controls, independent oversight, and proactive risk management in ensuring the stability and soundness of the banking system. The RBI's directives on investment portfolios and its ongoing supervision of lenders play a critical role in mitigating these risks and protecting the interests of depositors and investors.
Source: IndusInd Bank may take Rs 1,500 crore charge on derivatives portfolio adjustment