Sell IndusInd Bank stock; 17% target slashed as lender in uncharted waters: ICICI Sec

ICICI Securities has cut its rating on IndusInd Bank Ltd to 'Sell' from 'Hold' earlier, slashing its target price on the banking stock to Rs 650 from Rs 720 earlier, a drop of 17 per cent. The domestic brokerage said IndusInd Bank is in uncharted waters and should see a subpar industry growth of 8 per cent CAGR) and profitability  -- with less than 1 per cent return on asset (RoA) for FY25–27. 

"Valuations at 0.95x trailing FY25E and 0.85x FY27 ABV are not cheap given the uncertainties. We value the stock at 0.8x trailing FY25E ABV. Downgrade to Sell (from Hold) with a lower target of Rs 650 (against Rs 720," the domestic brokerage said.

On Monday, the stock was trading 0.49 per cent higher at Rs 786.10 on BSE. ICICI Securities said a series of unfavourable events at IndusInd Bank over the last few weeks – derivative loss, the sudden exits of the MD&CEO, deputy CEO and CFO – appears to have already dented investor
sentiment. 

"The current outcome adds to the uncertainties and could impact confidence on the reported financials," it said.

The private lender is facing renewed scrutiny after revealing a Rs 674 crore accounting discrepancy in its microfinance (MFI) portfolio. This comes on the heels of an earlier Rs 1,960 crore mismatch in its derivatives portfolio.

To recall, the bank had on April 22 announced that its Internal Audit Department (IAD) had begun reviewing its microfinance (MFI) business after certain concerns were flagged to management. In a follow-up update on May 8, IndusInd Bank disclosed that the IAD had completed its investigation, uncovering that Rs 674 crore had been erroneously recorded as interest income over three quarters of FY24–25. 

ICICI Securities estimated that the inflated interest income would translate to 17 basis points NIM impact, which can be said as recurring. "There is no clarity if the Rs 595 crore unsubstantiated balances would have a P&L impact. While the financial impact is limited (and quantified), the disclosures on inflated income further impacts the confidence on the reported financials. IIB had only recently shocked investors with the revelation of an Rs 2,000 crore derivative loss," the broking firm said.

It noted that both the MD & CEO and Deputy CEO have already vacated their posts abruptly and the bank is run by a committee of executives (link). 

"Presently, its board lacks a Whole-time Director too and we do not rule out supervisory actions. Credit ratings agencies have also recently lowered IIB’s rating with a negative outlook /watch. Thus, IIB has now found itself in uncharted waters, in our view," it said.