IndusInd Bank fiasco: How could it impact banking sector & is it a stock to buy amid recovery?

The recent accounting discrepancy at IndusInd Bank has sent shockwaves through the banking sector, raising concerns over corporate governance and financial stability. 

On March 10, IndusInd Bank disclosed a financial misstatement related to derivative transactions. The estimated impact of this issue stands at 2.35 per cent of the bank’s net worth, amounting to approximately ₹1,577 crore. Following the revelation, the stock plunged 27 per cent on March 11, wiping out nearly ₹20,000 crore in market capitalisation and prompting its inclusion in the Futures & Options (F&O) ban list.

RBI’s Assurance and Stock Recovery

Despite the sharp decline, IndusInd Bank shares showed signs of recovery after the Reserve Bank of India (RBI) stepped in to reassure customers. The central bank confirmed that IndusInd Bank remains ‘well-capitalised’ and its financial position is ‘satisfactory.’ The RBI also directed the bank’s board to implement necessary remedial measures.

In a statement issued on March 15, the RBI clarified, “The Reserve Bank would like to state that the bank is well-capitalised and the financial position of the bank remains satisfactory.”

IndusInd Bank’s CEO and Managing Director, Sumant Kathpalia, revealed that the accounting lapse was identified between September and October last year. The bank provided a preliminary update to the RBI last week, with the final impact assessment expected by early April following an external review.

The banking stock continued its recovery, rising around 3 per cent in intra-day deals on March 19, marking its third consecutive session of gains.

Impact on Banking Sector: Should Investors Stay Away?

The IndusInd Bank incident has sparked fears over corporate governance lapses and risk management practices in Indian banks. 

Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities, believes that the episode could prompt the RBI to tighten regulatory oversight, which may result in stricter compliance norms and more frequent audits. While this could enhance transparency, benefiting customers and investors in the long run, it does not necessarily signal systemic issues across the entire banking sector.

Sheth emphasised that stronger regulatory controls could ultimately boost investor confidence. “The sector is currently trading at low valuations, and improved governance could drive renewed interest, especially as the chaos settles and banks benefit from strong credit demand and improving financial metrics,” he noted.

Meanwhile, brokerage firm Motilal Oswal Financial Services (MOFSL) believes that larger private banks with diversified and secured portfolios are better positioned to navigate the current environment. 

The brokerage continues to prefer ICICI Bank, HDFC Bank, State Bank of India (SBI), and Kotak Mahindra Bank in the large-cap space, while favouring Federal Bank and AU Small Finance Bank among mid-sized banks.

What Should IndusInd Bank Investors Do?

For existing IndusInd Bank investors, the road ahead remains uncertain. Krishna Appala, Senior Analyst at Capitalmind Research, advises caution. For existing shareholders, he suggests avoiding averaging down the stock price and instead keeping a trailing stop-loss to protect against further downside. He reassures depositors, stating that there is no cause for alarm regarding the safety of their funds, as the RBI has confirmed the bank’s healthy capitalization and strong liquidity coverage ratio.

He also recommends that new investors refrain from bottom fishing, suggesting it is wiser to wait for more clarity on the bank's asset quality before considering entry.

Appala also notes that while IndusInd Bank is trading at attractive valuations—0.9 times its book value and 7 times its price-to-earnings (PE) ratio—the bank’s recovery could be gradual. "In financials, perception drives price. Concerns like these take time to settle. Long-term investors should avoid rushing into the stock and instead use trailing stop-losses to protect their portfolios," he advised.

Meanwhile, Bernstein has maintained its 'Outperform' rating on IndusInd Bank but has lowered the target price to ₹1,000 from ₹1,300. While the stock is considered attractively valued, the brokerage highlighted five key concerns that are deterring investors from committing: pledged stocks, management credibility, deposit outflows, accounting issues, and asset quality risks.

“Asset quality issues, accounting problems, and the sell-down of management stakes prior to the bank’s troubles—a sharp decline in the chief executive officer and deputy chief executive officer’s stock ownership from June 2023 to June 2024—have eroded confidence in the management, making the appointment of new leadership an urgent necessity,” the report said.

Bernstein believes that although IndusInd Bank's stock is currently undervalued, a re-rating will depend on at least one-quarter of stable performance metrics. This includes avoiding sharp deposit outflows and preventing any further accounting surprises. The firm also emphasized that appointing a chief executive officer with a standard three-year tenure is essential for the bank's recovery.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.