Shares of IndusInd Bank Ltd will be in focus on Friday, ahead of the PwC report on accounting discrepancies. Several reports suggested that the report will be submitted to the private lender's board either on Friday or by weekend. The report would be detailing the Rs 2,100 crore discrepancy in derivatives accounting and would outline the actual losses incurred by the bank, identify lapses at various levels, and suggest remedial actions.
In a note on March 26, BNP Paribas said IndusInd Bank's foreign deposits constitute a mere 1.6 per cent of liabilities but its recently indicated absolute derivatives loss appears to be over 20 per cent of its total foreign deposit book. The derivative position is therefore more likely to be interpreted as a currency view rather than pure hedging for business purposes, it said.
"Lending businesses are by nature opaque in addition to being leveraged. It is not the sort of set-up that inspires leaps of faith, and we feel that consistent delivery would be key to what is potentially a long and arduous redemption arc. Valuations at 0.95x 1- year forward P/B might be the only silver lining to the story now in its historical trading range context," the brokerage said.
The brokerage suggested 'Underperform' and a target of Rs 860 on the stock.
BNP Paribas said the biggest driver for IndusInd Bank's re-rating could be continued accelerated growth in its core high-yield loan segments. This is beneficial to the thesis of margin expansion, which if sustained over the next two years, could become a potential trigger for an equity dilution at a favourable valuation.
In the case of downside risks, given IndusInd Bank's last credit-cycle performance, a legacy wholesale loan book that is improving but below the best-in-class credit profile and a larger-than-most off-balance sheet credit exposure, substantial investment risks relate to adverse large credit events.
Earlier on Thursday, Emkay Global said it has removed IndusInd Bank from its model portfolio, given the uncertainty over leadership and the fallout of the derivatives accounting issue.
"Current valuations probably over-discount the negatives but we do not see an imminent recovery. With banks, we believe it is better to enter at a higher valuation when risks are more compressed, and sacrifice some upside than go bottom fishing. The replacement is Power Finance, which is attractive at 1 time P/BV and gives us additional exposure to our bullish view on the power sector," it said.