Global investment firm CLSA has significantly revised its target price for IndusInd Bank, lowering it from ₹1,300 to ₹900. This adjustment comes amidst concerns over a recent accounting error and uncertainties regarding the bank’s leadership. Despite the downgrade, CLSA has retained its ‘Outperform’ rating, drawing parallels with past market behaviors witnessed in RBL Bank and Yes Bank.

Recent Developments Affecting IndusInd Bank

IndusInd Bank has experienced a challenging week, beginning with a critical decision by the Reserve Bank of India (RBI). The RBI granted the bank’s Managing Director and CEO only a one-year extension, deviating from the typical three-year tenure. Shortly after this announcement, the bank revealed an accounting discrepancy that resulted in a ₹1,500 crore reduction in its net worth. These factors have raised red flags among investors, amplifying concerns about potential undisclosed risks.

Historical Comparisons with RBL Bank and Yes Bank

CLSA’s analysis indicates that the RBI’s extension decision for IndusInd Bank’s leadership echoes its past actions with RBL Bank in 2021. At that time, the RBI’s similar move led to a dramatic 60% drop in RBL Bank’s stock price. However, following a period of stabilization, RBL’s shares eventually recovered as the market adjusted. A comparable scenario unfolded with Yes Bank, which faced market jitters after its CEO was replaced unexpectedly. Despite initial fears, subsequent assessments indicated no significant issues in its loan performance, suggesting that IndusInd Bank might experience a similar market adjustment over time.

Heightened Uncertainty and Risks

In the near term, CLSA warns of increasing uncertainty surrounding IndusInd Bank’s stability and leadership structure. If the RBI decides to appoint a public sector banker, similar to its actions with RBL Bank, it could further dampen investor confidence. Additionally, if the promoters’ pledged shares are invoked, it may lead to increased market volatility. Nonetheless, CLSA believes that if IndusInd Bank maintains steady financial performance over the next four to six quarters, current market anxieties could subside.

Potential Upsides Amidst Challenges

Despite the downward revision of the share price target, CLSA identifies several optimistic factors for IndusInd Bank. Recovery in the microfinance sector, improved liquidity within the banking ecosystem, and possible interest rate cuts could offer short-term relief. Furthermore, if the bank’s promoters secure RBI approval to raise their stake following the acquisition of Reliance Capital, it could bolster investor trust.

Revised Profit and Growth Estimates

In light of a one-time extraordinary item affecting its derivative portfolio, CLSA has reduced its FY25 net profit forecasts for IndusInd Bank by 25%. Additionally, loan growth estimates have been trimmed by 2% for the upcoming two years, reflecting the bank’s need to address existing challenges. CLSA has slightly increased credit cost estimates for FY26 due to ongoing collection issues in Karnataka.

Conclusion: A Cyclical Play with Future Potential

Despite the current hurdles, CLSA maintains a positive outlook for IndusInd Bank, viewing it as a favorable cyclical opportunity, especially with the ongoing upswing in auto loans in India. The bank’s higher proportion of fixed-rate loans positions it advantageously during potential interest rate reductions. Given its relatively smaller market size, IndusInd Bank is expected to outpace its private sector peers in growth.

On Thursday, IndusInd Bank’s shares closed down by 1.84%, settling at ₹672.10 on the BSE. Investors will be closely monitoring the bank’s forthcoming performance and strategic decisions in light of these recent developments.