One share which appeared multiple times in news recently was the ‘IndusInd Bank share’. The stock is down by around 20% in the past 6 months, due to the discovery of various accounting mismatches. Now the question is, will the banking giant recover from its current troubles? Does the shares of this bank has a good future? Let’s explore.
What really happened with IndusInd Bank? Where did the things go wrong?
When it comes to finance, ‘trust’ is the main factor which will be noted by both the investors and the customers. If the trust seems to fade, the market will give a good reply.
Last year, RBI came up with various Regulations regarding the accounting for derivatives. RBI had necessitated all the banks to account for the daily profits/losses at market rates for derivative contracts. Further, the Regulator had banned the internal hedging of derivatives.
This made all banks to reassess their books with the new framework. But IndusInd found a major mismatch where the bank’s networth was 2.35% lower than the previously reported one. When the bank was supposed account for those contracts at market value, they used market values for the external trades and swap valuation for the internal hedging. As swap valuation method doesn’t account for the actual market valuation, the resulting mismatch in the valuation artificially boosted the bank’s net interest income. This suppressed the actual trading losses.
You can refer this news article reported on Business Standard to know more on this. This news article clarifies that, while all the other banks could comply with those new Regulations, issued by RBI last year, this bank implemented it in November last year.
This news came some time in this March, and marked the start of tuff time for its share prices. On the same day [when this news got published on media platforms] the stock tumbled more than 25% downwards. This was the first issue. Many investors were doubting, what to do if even other items were accounted wrongly.
But so soon, the other news came. It was about the accounting discrepancies in accounting for transactions in its microfinance lending. Even few other such adjustments were reported.
Discrepancies in MFI transactions were worse than that of accounting derivative transactions:
I came across this Money Control news report, which highlights that the accounting discrepancies found in microfinance transactions were worse than the issues with derivatives transactions. It states that, the mismatch in accounting micro finance related transactions could again be close to ₹ 2,000 crores. Further the NPAs seems to be more than what was actually accounted for.
So, with that it is clear that the net hit on the bank’s financials could be around ₹ 4,000 crores. You can read that news article [linked above] to know more about the issue.
What is holding IndusInd bank shares from falling further?
The first thing is, the plan for appointing the new CEO. The second is, assurance from the promoter group for infusing further capital into the bank. You can refer to this Economic Times report to know more about this matter.
So even now we can’t call the bank as sick. Its average LCR is still 118% as reported in the bank’s investor presentation. Usually if a bank faces troubles like this, it might take even a year or more to recover. This bank being one of the largest banks and having good promoters, has the probability of recovering soon.
Further, if the upcoming CEO performs better and takes a proper care of these matters, accompanied with good strategies, the company may see a good recovery.
The recovery is just the expectation, and kindly don’t consider it as assurance.
These are the reasons holding the stock price from falling further.
Is it worth investing in this banking stock?
Currently it is very uncertain to decide whether to invest in this stock or not. If we look at the fundamentals, we could notice that –they have a huge exposure to micro and corporate lending, their loan portfolio is almost flat and not growing, the cost to income is extremely high, and their GNPA is very high.
One more risk which I noted was, the declining CASA ratio. CASA deposits are the cheapest source of fund for a bank, since banks need not pay interest on current account deposits and very less interest for savings account deposit. This bank’s CASA has fallen by 6% on a Q-o-Q basis. This shows that, the current and savings account depositors are withdrawing very fast.
Declining CASA can negatively impact the bank’s net interest margins because, to pull more deposits the bank needs to offer more interest. This pressures their margins.
However their LCR remained high. So, investing in this stock currently is risky. Also, the stock price might see a nice volatility in the near future.
Concluding with my views
The bank currently needs a good management. The promoters are ready to infuse cash into the bank. So there is a high chance that the bank might be recovered and its CASA gets improved.
However, the bank’s high exposure to micro lending and the slow growth in their loan book is what making us to wait. Higher exposure to micro lending always has the risk of increasing the NPAs, especially after any economic downturns or natural calamities.
Currently the stock’s valuation is corrected and is at an attractive price. Without a clear view, investing in this company now is risky.
So it is better to wait for the situation to cool before deciding whether to invest or not.
Disclaimer:
This blog is only for informational purposes. I humbly request the readers to consult a SEBI Registered advisor or to do a proper analysis before taking any investment related decisions. This blog is not to tell you whether to buy or sell the share discussed. It is to provide clarity on the matter. The insights for the all those contents taken above are from the investor presentation released by the company, and from various other news sights.