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ING Vysya: Provision write-backs keep profits stable - Views on News from Equitymaster
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  • Feb 3, 2014 - ING Vysya: Provision write-backs keep profits stable

ING Vysya: Provision write-backs keep profits stable
Feb 3, 2014

ING Vysya Bank declared the results for third quarter and first nine months of financial year 2013-14 (9mFY14). The bank has reported 15% YoY growth in net interest income for 9mFY14 while net profits have grown by 17% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows 15% YoY in 9mFY14 backed by 8% YoY growth in advances.
  • Net interest margin drops marginally to 3.4% in 9mFY14 from 3.5% in 9mFY13.
  • Cost to income ratio comes down to 54.4% in 9mFY14 from 56.8% in 9mFY13.
  • Bottomline grows 17% YoY in 9mFY14 despite substantial rise in provisioning costs.
  • Net NPA to advances rise to 0.2% from 0.05% in 9mFY13. The bank has, however, not divulged the restructured assets at the end of June quarter.
  • Capital adequacy ratio (CAR) at 16.9% in December 2013 as against 12.5% in December 2012.

(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 12,388 12,732 2.8% 36,078 38,991 8.1%
Interest Expense 8,359 8,572 2.5% 24,928 26,172 5.0%
Net Interest Income 4,029 4,160 3.3% 11,150 12,819 15.0%
Net interest margin (%)       3.5% 3.4%  
Other Income 1,865 2,145 15.0% 5,264 6,437 22.3%
Other Expense 3,262 3,564 9.3% 9,330 10,480 12.3%
Provisions and contingencies 246 230 -6.5% 576 1,091 89.4%
Profit before tax 2,386 2,511 5.2% 6,508 7,685 18.1%
Tax 763 839 10.0% 2,081 2,496 19.9%
Profit after tax/ (loss) 1,623 1,672 3.0% 4,427 5,189 17.2%
Net profit margin (%) 13.1% 13.1%   12.3% 13.3%  
No. of shares (m)         156.7  
Book value per share (Rs)*         369.3  
P/BV (x)         1.4  
*Book value as on 31st December 2013

What has driven performance in 1QFY14?
  • Despite a slower growth in loan book and deposits, ING Vysya Bank managed to keep its performance stable during the 9 month period. Moreover the bank managed to scale up the proportion of CASA deposits as well from 31.7% to 34.7%.

    As per the management, the growth in loan book is notwithstanding the repayment in some large corporate accounts during the period. Without these repayments the advance growth would have been higher.

    While the improved accretion of low cost deposits and higher capital support, the bank managed to avert the pressure on its net interest margins despite higher interest costs. As the bank grows its franchise and re-prices its assets, we expect them to bring in more long term stability in ING's margins.

    Modest pace of growth
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Advances 315,806   340,484   7.8%
    Retail 192,642 61.0% 236,296 69.4% 22.7%
    Corporate 123,164 39.0% 104,188 30.6% -15.4%
    Deposits 376,909   389,560   3.4%
    CASA 119,480 31.7% 135,177 34.7% 13.1%
    Term deposits 257,429 68.3% 254,383 65.3% -1.2%
    C/D ratio 83.8%   87.4%    

  • ING Vysya has in the past made a commendable effort in improving its cost efficiency. However, the improvement in cost efficiency has been muted over the past 9 months and is yet to get closer to the average of private sector banks. In 9mFY14 too, the cost to income ratio stood at 54.4% as against 56.8% in 9mFY13.

  • ING Vysya has in the past few quarters also addressed its concerns with regard to its lower provision coverage. The bank's NPA coverage ratio went up from 83.4% (in FY11) to 98% in FY13. In 9mFY14, however it stood at 87.4% and the bank has written back some provisions with regard to restructured assets in 3QFY14. While the net NPA level has gone up to 0.2% from 0.05% in the past 12 months, the gross NPAs remained stable at 1.7%. The spurt in provisions during 9mFY14 may be indicative of the bank expecting additional slippage in quality. Also, we are concerned about the fact that the bank has not divulged the quantum of restructured assets at the end of December 2013.

  • The proportion of other income to total income has remained stable at around 33%.

  • ING Vysya Bank's return ratios (post QIP in 2013) have got diluted to single digits (9.5% in 3QFY14) and will recover over a longer period of time as the bank's growth and profitability catches up.
What to expect?
At the current price of Rs 511, the stock is trading at 1.4 times our estimated FY16 adjusted book value. While we are enthused by the bank's emphasis on cost reduction measures and margin sustainability, marginal deterioration in asset quality cannot be ruled out. The stock has corrected after our Sell recommendation in April 2013. We recommend investors to not buy the stock at current levels.

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