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ING Vysya Bank: Bracing with tough times - Views on News from Equitymaster

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ING Vysya Bank: Bracing with tough times

Feb 6, 2009

Performance summary
  • Interest income grows 33% YoY in 9mFY09 on the back of 19% YoY growth in advances.
  • Net interest margin improves from 2.7% in 9mFY08 to 3.0% in 9mFY09 due to higher proportion of CASA.
  • Cost to income ratio declines from 69% to 66% in the last 12 months.
  • Bottomline grows 23% YoY in 9mFY09 despite higher provisioning costs. Excluding the extraordinary item (sale of investment in non banking subsidiary), the bottomline has grown by 49% YoY.
  • One of the lowest capital adequacy ratios of 10.7% at the end of 9mFY09. ING Bank N.V. to infuse capital by way of perpetual bonds in foreign currency.

(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 4,207 6,202 47.4% 12,299 16,302 32.5%
Interest Expense 2,758 4,475 62.3% 8,720 11,429 31.1%
Net Interest Income 1,449 1,727 19.2% 3,579 4,873 36.2%
Net interest margin (%)       2.7% 3.0%  
Other Income 956 1,491 56.0% 2,796 4,006 43.3%
Other Expense 1,589 2,153 35.5% 4,380 5,850 33.6%
Provisions and contingencies 277 216 -22.0% 339 847 149.9%
Profit before tax 539 849 57.5% 1,656 2,182 31.8%
Extraordinary items 183 -   204 -  
Tax 296 328 10.8% 719 784 9.0%
Profit after tax/ (loss) 426 521 22.3% 1,141 1,398 22.5%
Net profit margin (%) 10.1% 8.4%   9.3% 8.6%  
No. of shares (m)       102.4 102.6 102.8
Book value per share (Rs)*         163.5  
P/BV (x)         0.8  
*Book value as on 31st December 2008

What has driven performance in 3QFY09?
  • Having one of the lowest capital adequacy ratios at a time when the overall banking sector was constrained for liquidity did not bore too well for ING Vysya Bank in 3QFY09. The slower accretion of low cost deposits, forced the bank to largely rely on growth of term deposits. The bank, however, managed to grow its advance book by 19% YoY in 9mFY09. While the bank has not divulged the breakup of advances into corporate and retail, a large share of its advances continue to remain concentrated in corporate and SME assets. The bank also managed to marginally improve the proportion of CASA deposits from 27% in 9mFY08 to 29% in 9mFY09, which helped it improve the net interest margin (NIMs) from 2.7% to 3% by the end of the third quarter.

    Focusing on cost
    (Rs m) 9mFY08 % of total 9mFY09 % of total Change
    Advances 134,090   160,140   19.4%
    Deposits 178,710   224,010   25.3%
    CASA 54,060 27.3% 58,180 29.7% 7.6%
    Term deposits 124,650 69.7% 165,830 74.0% 33.0%
    C/D ratio 75.0%   71.5%    

  • 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 59% in 3QFY08 to 66% in 3QFY09. The same, however, continues to stay well above that of private sector banks and some PSU banks. Employee costs comprised 49% of the bank’s operating costs in 9mFY09. The bank has also started providing for AS-15 on a pro-rata basis. ING Vysya has recently got RBI licences to open 56 new branches and 100 ATMs.

  • ING Vysya, however, failed to contain additional slippages in its asset book over the last few quarters as the NPAs, both at gross and net levels increased marginally. While the gross NPAs increased from 1.8% of advances in 3QFY08 to 1.9% of advances in 3QFY09, net NPAs increased from 0.7% to 1.0%.

  • The concerns with regard to the shortage of capital for the bank were primarily based on the fact that the parent entity (ING Bank NV) was itself seeking financial bailout from the Netherlands government. Also, the RBI in recent times has been very strict with banks failing to stay above the minimum CAR (9%) requirement and ING Vysya is close to breaching the same. In October 2008, the bank increased its capital through the issue of Tier 1 Perpetual debt amounting to Rs 950 m. Subsequent to that, ING raised an additional Rs 2 bn of Upper Tier 2 capital which was subscribed entirely by ING Group.

What to expect?
At the current price of Rs 134, the stock is trading at 0.7 times our estimated FY11 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 mended its ways over the past few quarters. We had recommended a Sell in October 2007, since which it has corrected 44%. At the current valuations and with improved visibility into the future of the bank, the stock appears relatively attractive than in the past, for the longer term.

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