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ING Vysya Bank: No surprises - Views on News from Equitymaster
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ING Vysya Bank: No surprises
Feb 4, 2008

Performance summary
  • Interest income grows 32% YoY on the back of 24% YoY growth in advances.
  • Net interest margin sustained at 3.2% in 1HFY08.

  • Cost to income ratio declines from 71% in 3QFY07 to 67% in 3QFY08.

  • Bottomline doubles YoY due to the impact of extraordinary income in 3QFY08. Excluding the extraordinary item, 3QFY08 bottomline has grown by 68% YoY over 3QFY07.

  • Return on equity improves from 5.3% in 3QFY07 to 16.6% in 3QFY08.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Interest income 3,305 4,376 32.4% 9,640 13,057 35.4%
Interest Expense 2,078 2,818 35.6% 6,075 8,889 46.3%
Net Interest Income 1,227 1,558 27.0% 3,565 4,168 16.9%
Net interest margin (%)       3.2% 3.2%  
Other Income 403 904 124.3% 1,351 2,310 71.0%
Other Expense 1,157 1,645 42.2% 3,743 4,483 19.8%
Provisions and contingencies 259 277 6.9% 533 338 -36.6%
Profit before tax 214 540 152.3% 640 1,657 158.9%
Extraordinary items - 184   335 204 -39.1%
Tax 70 296 322.9% 269 719 167.3%
Profit after tax/ (loss) 144 428 197.2% 706 1,142 61.8%
Net profit margin (%) 4.4% 9.8%   7.3% 8.7%  
No. of shares (m) 90.7 90.9   90.7 90.9  
Book value per share (Rs)*         160.6  
P/BV (x)         1.9  
*Book value as on 31st December 2007

What has driven performance in 3QFY08?
  • Well-oiled: ING Vysya Bank raised capital to the tune of Rs 3.5 bn in 3QFY08 through private placement of equity shares to Qualified Institutional Buyers (QIBs) and through preferential allotment to the ING Group. This improved the capital adequacy ratio of the bank from 10.7% to 12.2%, enabling it to clock a healthy growth rate in advances as well as deposits. The bank continued in its attempt to catch up with its peers in the private sector. Further the fact that it has been able to retain its CASA (low cost deposits) proportion at 30% is also enthusing.

    Balanced growth…
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Advances 108,272   134,086   23.8%
    Deposits 143,798   178,708   24.3%
    CASA 43,396 30.2% 54,061 30.3% 24.6%
    Term deposits 100,402 69.8% 124,647 69.7% 24.1%
    C/D ratio 75.3%   75.0%    

    ING Vysya was able to pass on the entire hike in cost of funding to its borrowers, thereby sustaining its net interest margin (NIMs) at 3.2%. Also, unlike most of its peers, the bank has not been very aggressive in terms of garnering high cost term deposits and has instead concentrated on its CASA base (current and savings account) that has grown by an appreciable 25% YoY.

  • Controlling costs: Having the blemish of bearing one of the highest cost to income ratio in the sector, ING Vysya has effectively put an effort on this front and pared the ratio from 71% in 3QFY07 to 67% in 3QFY08. This is despite the fact that the bank opened 10 new branches and 66 new ATMs during the last 12 months. The same, however, continues to stay well above that of private sector banks and some PSU banks. Employee costs comprised 47% of the bank’s operating costs in 2QFY08. The bank has also started providing for AS-15 on a pro-rata basis. ING Vysya has recently RBI licences to open 56 new branches and 100 ATMs.

    Other income for 3QFY08 registered a growth of 124% YoY driven by strong growth of fee income in both retail and wholesale segments. The proportion of ING’s fee income is, however, lower than that of its peers. The extraordinary income in the past quarter is due to profit on sale of a non-banking asset.

What to expect?
At the current price of Rs 308, the stock is trading at 1.9 times our estimated FY10 adjusted book value. The bank continues to have the highest cost to income ratio, which is a drag on its bottomline. Also, it needs to revisit its provisioning policies. While the bank certainly has a long way to go before catching up with its peers, it has been able to partially overcome the problem of capital shortage that was paralysing its growth prospects. ING has mended its performance over the past few quarters and this gives investors some reason to cheer about.

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