IndusInd Bank Faces Turmoil, But CLSA Maintains ‘Overweight’

Despite the ongoing uncertainty surrounding IndusInd Bank’s leadership and financial stability, international brokerage CLSA remains optimistic about the lender’s stock performance, projecting a 31% upside.

Stock Performance Amid Market Uncertainty

IndusInd Bank’s stock has been on a tumultuous ride, shedding more than 60% from its 52-week high. The recent decline was exacerbated by concerns over discrepancies in the bank’s derivatives portfolio, as well as the uncertainty surrounding its top leadership. However, CLSA, a global brokerage firm, has retained its ‘overweight’ rating on the stock, citing long-term fundamentals that could drive a potential recovery.

• Stock Target Revision: While CLSA maintained a positive outlook, it did cut its price target for IndusInd Bank shares from Rs 1,300 to Rs 900, reflecting the heightened volatility and risk associated with the stock.
• Market Reaction: At 9:20 AM on Thursday, IndusInd Bank shares were trading at Rs 696.3, up 1.7% on the NSE, as investors processed the latest developments.

Management Uncertainty Adds to Investor Concerns

A significant factor contributing to investor skepticism is the Reserve Bank of India’s (RBI) decision to approve only a one-year extension for IndusInd Bank CEO Sumant Kathpalia, instead of the three-year term recommended by the board.

• CEO’s Statement: Addressing analysts after the RBI’s decision, Kathpalia acknowledged that the regulator “may be uncomfortable” with his leadership skills, a comment that further fueled speculation about the bank’s governance.
• Leadership Concerns: Analysts at CLSA highlighted that if the bank were to appoint a PSU banker as the next CEO after Kathpalia’s tenure, it could lead to further negative sentiment in the stock market.

Potential Risk of Promoter Stock Pledge Invocation

Given the sharp correction in IndusInd Bank’s share price, another looming concern is the risk of lenders invoking the promoter’s stock pledge. If this were to happen, it could introduce additional volatility and sell-off pressure on the stock.

However, CLSA maintains that fundamentals will eventually drive the stock price higher, despite these near-term uncertainties.

Positives That Could Drive Recovery

While the bank is facing multiple headwinds, CLSA identified two major fundamental positives that could support a turnaround:

1. Revival in the Microfinance Sector: IndusInd Bank has significant exposure to microfinance, a segment that has been struggling in recent years. However, a recovery in microfinance could provide a much-needed boost to the bank’s asset quality and earnings.
2. Favorable Banking Environment: The RBI’s expected monetary policy easing and improved banking system liquidity are likely to support margins and stabilize earnings.