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ING Vysya Bank: Struggling to catch up… - Views on News from Equitymaster
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ING Vysya Bank: Struggling to catch up…
Jan 23, 2006

Performance Summary
ING Vysya Bank has announced its results for the third quarter and nine-month period ended December 2005, showing very muted signs of growth and profitability. The bank, after turning around early this fiscal, has made appreciable attempts to grow its asset book, which is visible even in the current quarter. However, a lot is desired on the fee income, provisioning, asset quality and operating efficiency fronts.

Rs (m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Income from operations 2,425 3,078 26.9% 7,244 9,082 25.4%
Other Income 472 421 -10.8% 542 1,439 165.5%
Interest Expense 1,511 1,879 24.4% 4,573 5,599 22.4%
Net Interest Income 914 1,199 31.2% 2,671 3,483 30.4%
Net interest margin (%)       3.3% 3.1%  
Other Expense 941 1,191 26.6% 2,659 3,439 29.3%
Provisions and contingencies 341 326 -4.4% 1,271 903 -29.0%
Profit before tax 104 103 -1.0% (717) 580  
Tax 41 53 29.3% (288) 243  
Profit after tax/ (loss) 63 50 -20.6% (429) 337  
Net profit margin (%) 2.6% 1.6%   -5.9% 3.7%  
No. of shares (m)       22.7 100.0  
Diluted earnings per share (Rs)*         2.9  
P/E (x)         56.9  
* (12 months trailing)            

South based private sector bank
ING Vysya Bank is one of the oldest private sector banks in the country, in which the ING Group of the Netherlands holds a 44% stake. Though the bank has a large regional exposure in the southern region, it is slowly expanding its presence across the country. ING's participation in the bank's management brought about a turnaround of sorts in the functioning of the bank. However, the bank exhibited a very poor operational performance in FY05 and also lagged in terms of asset quality.

What has driven performance in 3QFY06?
Assets-delivering promises: ING Vysya Bank after several quarters of disappointment in asset growth has started exhibiting some consistency in its incremental credit disbursals. The bank’s net interest income (NII) has grown by a very appreciable 31% YoY during 3QFY06. While the bank continues to have a higher exposure to high and middle level corporate segments (20% higher YoY in FY05), it is now following the industry leaders in targeting the high yielding retail and SME assets (46% of advance book in FY05). Of this, going forward, the bank is willing to have a higher exposure to the SME (small and medium enterprise) and consumer financing business in its credit book. The bank, however, is ‘back to square one’ when it comes to improving the net interest margins (NIMs). The NIMs, which had shown some signs of improvement in the last quarter, have once again dipped due to pressure on the cost of funds.

Growth filtering in…
(Rs m) 9mFY05 % of total 9mFY06 % of total Change
Total assets 134,411   153,570   14.3%
Banking operations 92,677 69.0% 103,835 67.6% 12.0%
Treasury 41,734 31.0% 49,735 32.4% 19.2%
           
Total revenue 8,781   12,967   47.7%
Banking operations 6,775 77.2% 9,995 77.1% 47.5%
Treasury 2,006 22.8% 2,972 22.9% 48.2%

Other income – little upside: ING Vysya continues to under-perform its peers in terms of fee income growth. Infact, despite the lower base effect due to treasury losses in 3QFY05, the bank has witnessed a fall in its other income in 3QFY06. Nevertheless, its other income for the nine-month period has shown a quantum growth due to the extraordinary impact of profit from sale of investments. It may be recalled that with the sale of its entire 14.9% stake in ING Vysya Life Insurance to Gujarat Ambuja Cements (GACL), the bank had a one-off gain of Rs 229 m in 2QFY06. This alone comprised 16% of its other income in 9mFY06. Other than this, the bank seems to showing no momentum in terms of fee income growth, which is likely to prove detrimental to its profit margins going forward. All said, the fact that the bank now has 70% of its investments in the HTM (held to maturity) category and has consistently reduced the duration of investments in both AFS (available for sale) and HTM baskets, reduces risks on the treasury side.

No cover: Although the bank’s net NPA to advance ratio has reduced to 1.7% in 3QFY06 from 2.7% in 3QFY05, it should not be comprehended that the bank can afford to book lower provisioning in the subsequent quarters. Infact, it is alarming to note that the bank has almost zero NPA coverage and in the wake of increase in the incremental slippages (and therefore rise in gross NPA levels) the bank’s delinquency ratios will increase. The fact that the bank continues to cushion its bottomline through lower provisioning is therefore a concern.

Further divestment: The bank has further notified that in line with its divestment of stake in ING Vysya Life, it has decided to sell its entire stake in ING Investment Management Company, which is currently classified as a ‘held-to-maturity’ investment in its books. The same is expected to yield treasury gains for the bank.

What to expect?
With a capital adequacy ratio of 10.4%, ING Vysya stands constrained to sustain its current asset growth levels. More so, given the fact the bank has also to prepare itself with Basel II compliances. Also, the bank continues to have the highest cost to income ratio (approximately 70% in 9mFY06) in the sector, which is a drag on its bottomline. Its decision to rollout the core banking solution to all branches by May 2006 might call for additional capital requirement and higher operational overheads.

At the current price of Rs 165, the stock is trading at an expensive 1.8 times our estimated FY08 adjusted book value. While the bank seems to have finally got its act together, in terms of restructuring its wholesale and retail lending operations, hedging its treasury portfolio and concentrating its asset quality, inconsistencies in performance and limited geographical foray continue to remain our concerns. Also, limited parental support from ING (atleast until FY09) caps any significant upsides in the bank’s operations.

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