IndusInd and Yes: Where should investors put their money after the disappointment?

 While IndusInd Bank's provisioning wasn't due to a new RBI regulation, the first victim of the same was Yes Bank. Its pristine asset quality amid the turmoil in Indian corporate lending space was always suspect. Yes Bank declared their numbers yesterday. Amid the otherwise picture perfect results the performance on the asset quality front came as a shocker and beckons attention. IndusInd Bank, despite a very strong core performance marked by 31 percent growth in net interest income (difference between interest income and interest expenses) and 33 percent surge in non-interest income reported a rather muted 21 percent growth in profit. The result was clearly marred by 101 percent rise in provision. The management mentioned that they provided Rs 122 crore on a bridge loan for a large M&A transaction in the cement space pursuant to specific RBI advice in this regard. The provision is expected to get reversed on closure of the deal. While this could have easily been ignored as a one-off, the RBI’s recent circular makes us a lot more cautious

From FY17 onwards, banks will need to provide new disclosures where the shortfall in provisions as per RBI norms exceeds 15 percent of the reported net income and/or there is 15 percent difference between the reported gross NPAs and RBI-assessed gross NPAs. While IndusInd Bank's provisioning wasn't due to this new regulation, the first victim of the same was Yes Bank. Its pristine asset quality amid the turmoil in Indian corporate lending space was always suspect. However, having managed to come clean so far, the stock has had a stellar run with significant re-rating in valuation. The headline profitability number from Yes Bank left little room for complaint. Earnings grew by 30 percent in the final quarter of FY17 backed by 32 percent growth in interest earnings and 57 percent in non-interest earnings. A decline in the provision coverage ratio shielded the headline profitability number.

 The stark revelation from the earnings was classification of one account of Rs 911.5 crore as non-performing in accordance with the divergence observed by RBI. Interestingly, this divergence will now have to be highlighted for FY15 and FY16 as well, thereby raising the possibility of more skeletons in the closet. Consequently, the reported gross and net NPL surged sequentially by 79 percent and 179 percent, respectively. Now, the moot question that investors would like an answer to is what to do with the stocks? Undoubtedly, the rise in provision on account of this cement asset for a consistent retail-focused player like IndusInd was a surprise – but not a shocker yet, if this truly turns out to be one-off.  The bank has built a solid franchise with balanced asset mix (52 percent corporate, 48 percent retail), healthy interest margin of 4 percent that has the possibility to improve as the asset mix moves in favour of high yielding retail and a decent low cost deposit share of 36 percent 

 Read more for Indian Stock Tips- http://bit.ly/ace_services