IndusInd Bank's Struggle Continues Amid Multiple Challenges
Private sector lender IndusInd Bank Ltd finds itself navigating turbulent waters as multiple factors converge to cloud its recovery prospects. The bank's performance has been disappointing across several key metrics, with its stock declining by 14% in the current calendar year while the Nifty Bank index has gained approximately 16% during the same period.
Declining Market Position and Loan Growth
The bank's standing in the market has noticeably deteriorated, slipping from the top five to eighth place in terms of index weightage as of October 31. This decline began following the Q4FY25 results, when IndusInd Bank reported a loss for the first time in 19 years, marking a significant turning point in its financial journey.
Historically, the bank pursued aggressive growth by venturing into riskier lending segments including microfinance loans, commercial vehicle financing, and lower-rated corporate credit. These segments constituted a substantial portion of its loan portfolio, accounting for close to 25% in Q2FY26 compared to approximately 30% in Q2FY25.
Asset Quality Concerns and Portfolio Changes
The bank's microfinance exposure has seen a notable reduction, decreasing from ₹32,723 crore (10% of total loans) in Q2FY25 to ₹21,321 crore (7% of total loans) in Q2FY26. Similarly, the corporate loan portfolio, particularly exposure to mid- and lower-rated companies, has fallen by 21% year-on-year as the bank exercises greater caution following earlier slippages.
This strategic shift has impacted overall loan growth, with total advances falling by 9% year-on-year in Q2FY26. Notably, IndusInd Bank was the only institution among the top five by market capitalization to report a decline in loans during this quarter.
On the asset quality front, the gross non-performing asset (NPA) ratio showed marginal sequential improvement to 3.60% in Q2FY26 from 3.64% in the previous quarter. However, the year-on-year comparison reveals a more concerning picture, with GNPAs sharply rising from approximately 2.11% in Q2FY25 to the current level.
Governance Issues and Financial Impact
The challenges extend beyond conventional financial metrics. The bank faces significant corporate governance concerns that have raised red flags among investors and analysts. The loss reported in Q4FY25 wasn't solely attributable to stressed loans but also involved accounting lapses, operational oversights, and irregularities in reporting practices.
An internal review revealed that derivative accounting discrepancies resulted in a 2.35% hit to net worth as of December 2024, amounting to nearly ₹1,530 crore. Later, an external agency quantified the negative impact at ₹1,979 crore as of June 30, 2024. Additionally, the bank incorrectly recognized interest income of ₹684 crore in the microfinance segment.
These governance issues have compounded the bank's financial challenges, with provisioning increasing by 45% year-on-year and profitability suffering significantly, leading to a ₹437 crore loss in Q2FY26.
Analyst Outlook and Future Prospects
According to a JP Morgan Global Markets Strategy report dated November 14, the bank has undergone substantial changes in both management and strategy following the discovery of multiple issues, including alleged fraud. While the bank maintains adequate capital, analysts believe the liability, fee, and asset franchise will require considerable time to recover following the current overhaul.
The report cautioned that these factors could result in low PPoP return on asset for an extended period, potentially limiting the bank's ability to grow without consistent capital injections. Currently, the stock trades at 0.9x FY27 book value, which may appear cheaper than peers but largely reflects the prevailing uncertainty surrounding the bank's future prospects.
Despite corrective measures being implemented, IndusInd Bank's turnaround appears to remain a distant goal as it grapples with the combined weight of operational challenges, governance concerns, and market skepticism.
