IndusInd Bank fraud: Will it trigger deposit outflows? Stock brokers cut FY26 EPS estimate by up to 45%

Stock analysts are a worried lot. IndusInd Bank Ltd just announced a Rs 173-odd crore internal fraud involving certain employees amid a couple of accounting discrepancies reported by the private lender earlier. These events, and a surge in slippages in the microfinance business, has raised concerns over the likely impact on retail deposits, liquidity requirements, net interest margin (NIM) and the overall business growth in the near-term. Some brokerages have even cut their FY26 EPS estimates for IndusInd Bank by up to 45 per cent. 

History suggests it takes 3-4 years for banks to recover after reporting accounting discrepancies. Will this time differ? 

MOFSL took note of multiple one-offs, including the reversal of several accounting lapses. It noted that the bank’s advances book declined during the quarter, driven by a strategic pullback from corporate lending in a bid to conserve liquidity and manage the balance sheet more efficiently. The brokerage highlighted muted deposit growth amid ongoing concerns over corporate governance. It also pointed out that the bank has been maintaining elevated liquidity buffers to manage deposit outflows, which, coupled with recent high-cost certificate of deposit issuances, has led to increased funding costs. 

Given these developments, the brokerage cut its earnings estimates for FY26 and FY27 by 45 per cent and revised its target price for the stock to Rs 650.

Nuvama also flagged low earnings visibility for the current financial year, citing uncertainty surrounding the response of retail depositors following back-to-back disclosures of financial discrepancies in FY25. The brokerage stated that past experience indicates that banks typically take three to four years to stabilise after such episodes. 

While IndusInd Bank, due to its size, may recover more quickly, Nuvama believes the return on assets (RoA) will remain below 1 per cent through FY27. The brokerage added that IndusInd may need to maintain high liquidity at least through the first half of FY26, which would continue to weigh on net interest margins (NIMs).

Other brokerages have also adjusted their outlook. Morgan Stanley downgraded IndusInd Bank to 'Underweight' and reduced its target price to Rs 700 from Rs 755. HSBC revised its target to Rs 660 from Rs 770. Investec maintained a 'Sell' rating and set a new target of Rs 650. IIFL lowered its target to Rs 690 from Rs 750, while CLSA retained a 'Hold' rating with a revised target of Rs 725, down from Rs 780. On Wednesday, the bank’s stock closed at Rs 766.80.

Nirmal Bang reduced its EPS estimates for FY26 by 23.6 per cent and for FY27 by 13 per cent, valuing the stock at 0.8 times its March 2027 estimated adjusted book value and assigning a target price of Rs 730. The brokerage noted that this valuation represents a 47 per cent discount to the bank’s five-year average multiple of 1.5 times. It cited a slowdown in loan growth, stress in the unsecured loan segment, and uncertainties around management transition as key overhangs on the stock in the near to medium term. The firm maintained a 'Hold' rating.

According to Nuvama, the bank's financial disclosures revealed one-off adjustments across several key metrics including net interest income, fees, operating expenses, credit cost, and non-performing loans. The management indicated that after adjusting for these one-offs, a reported operating loss of Rs 500 crore would instead reflect a pre-provision operating profit of Rs 3,060 crore.

IndusInd Bank, in its Q4 earnings, disclosed a potential internal fraud involving Rs 172.58 crore which had been incorrectly recorded as fee income during FY25. Additionally, the bank stated that a cumulative amount of Rs 670 crore in the microfinance business had been wrongly recorded as interest income during the first nine months of FY25 and was fully reversed as of January 10, 2025. The bank also reported unsubstantiated balances totalling Rs 595 crore in its ‘other assets’ accounts, which were offset against corresponding balances in ‘other liabilities’ accounts.

These issues come after the bank had already reported a profit and loss impact of Rs 1,960 crore due to accounting discrepancies related to internal derivative trades. Further, misclassification of certain microfinance loans led to under-provisioning and non-recognition of non-performing assets (NPAs) amounting to Rs 1,885 crore, which the bank corrected in the fourth quarter of FY25. Including these corrections, overall slippages in the microfinance segment stood at Rs 3,510 crore, resulting in interest reversals of Rs 180 crore.

Looking ahead, the bank is in the advanced stages of appointing a new CEO and is expected to submit its proposal to the Reserve Bank of India by June 30, 2025. Analysts expect the new leadership to focus on strengthening internal controls, enhancing governance practices, and possibly rebalancing the bank’s asset mix. Nuvama noted that while the new CEO may accelerate recovery, the uncertainty surrounding depositor behaviour and high liquidity requirements will continue to exert pressure on margins and profitability in the near term.