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ING Vysya Bank: Cost focused - Views on News from Equitymaster

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ING Vysya Bank: Cost focused

Feb 21, 2007

Performance summary
ING Vysya Bank recently announced results for the third quarter and nine months ended December 2006, reporting a surprise jump in bottomline after the muted performance over the past few quarters. While there is very little to mention on the balance sheet growth front, the fact that the bank has successfully contained its high funding and operating costs and enhanced its margins is enthusing. Having said that, the callousness towards provisioning calls for caution.

Rs (m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Income from operations 3,078 3,443 11.9% 9,082 10,044 10.6%
Other Income 421 403 -4.3% 1,439 1,686 17.2%
Interest Expense 1,879 2,078 10.6% 5,599 6,075 8.5%
Net Interest Income 1,199 1,365 13.8% 3,483 3,969 14.0%
Net interest margin (%)       3.6% 3.8%  
Other Expense 1,191 1,157 -2.9% 3,439 3,743 8.8%
Provisions and contingencies 326 397 21.8% 903 938 3.9%
Profit before tax 103 214 107.8% 580 974 67.9%
Tax 53 70 32.1% 242 269 11.2%
Profit after tax/ (loss) 50 144 188.0% 338 705 108.6%
Net profit margin (%) 1.6% 4.2%   3.7% 7.0%  
No. of shares (m) 90.4 90.7   90.4 90.7  
Diluted earnings per share (Rs) 2.2 6.4   5.0 10.4  
P/E (x)         17.3  

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 exposure in the southern region, it is slowly expanding its presence across the country. ING's participation in the management had earlier brought about a turnaround of sorts in the functioning of the bank. However, the bank exhibited a very poor operational performance in FY06 and also lagged in terms of asset quality.

What has driven performance in 3QFY07?
Appalling shortage of funds: While its peers in the private sector banking space pursued their balance sheet growth targets at a breakneck speed in the last two fiscals, ING Vysya Bank, having made a late start, clock barely low double digit growth in its advance book during the period. The same has not changed in this quarter as well with the bank remaining satisfied with a mere 11% YoY growth in advances, due to the shortage in funds. It may be recalled that while the bank showed a marked improvement in advance growth in FY05 (31% YoY), almost catching up with its peers in the sector, it failed to show a similar performance in FY06 (13% YoY growth in advances). The same highlights the necessity of the bank to invest in the expansion of franchises and get rid of its southern-region concentration. Also, retail assets continue to occupy a small proportion of the bank’s total advance portfolio (16% in FY06).

CASA picks up...
(Rs m) 9mFY06 % of total 9mFY07 % of total Change
Advances 97,260   108,270   11.3%
Deposits 129,020   143,799   11.5%
CASA 32,810 25.4% 43,400 30.2% 32.3%
Term deposits 96,210 74.6% 100,399 69.8% 4.4%
C/D ratio 75.4%   75.3%    

While the cost of deposits for the bank increased by 20 basis points over that of 9mFY07, the yield on advances have enhanced by 50 basis points over the same period. This has had a benign impact on ING Vysya’s net interest margins that have shown an improvement of 20 basis points. 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 32% YoY. It may, however, be noted that the bank raised an amount of Rs 780 m as Tier II capital in 2QFY07 (coupon rate of 9.7% per annum and a tenure of 10 years), which may impact its margins going forward.

Other income jilts: The heavy reliance of the bank’s non-interest income on treasury gains and sale of assets has proven to be very vicious in this quarter as the lack of improvement in fee based revenues has actually caused its other income to fall. However, the extraordinary profits garnered through sale of stake in Bharat Overseas Bank (post tax profits of Rs 264 m) in 1HFY07 propped up the other income figure for the nine-month period.

Costs – Well contained: Having the blemish of bearing one of the highest cost to income ratios in the sector, ING Vysya Bank has effectively put an effort on this front and pared the ratio from 70% in 9mFY06 to 66% in 9mFY07. 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 9mFY07.

NPAs – Callous approach: Although the bank’s net NPA to advance ratio has reduced to 1.3% in 9mFY07 (from 1.7% in 9mFY06), it should not be comprehended that the bank can afford to book lower provisioning in the subsequent quarters. In fact, it is alarming to note that the bank has the least NPA coverage amongst its peers and in the wake of increase in incremental slippages (and therefore rise in gross NPA levels), its delinquency ratios will increase. The fact that the bank continues to cushion its bottomline through lower provisioning is therefore a concern.

What to expect?
The capital adequacy ratio of 10.7%, compared to 10.4% in 9mFY07, is certainly not sufficient to fuel the bank’s future growth, more so since it needs to comply itself with Basel II compliances (due March 2007). 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.

At the current price of Rs 178, the stock is trading at 1.7 times our estimated FY09 adjusted book value. While the bank has certainly mended its performance over the past few quarters after posting losses in FY05, the fact that it has a long way to go before catching up with its peers dampens expectations. Inconsistencies in performance and limited geographical foray continue to stress the bank’s valuations. Also, growth in terms of advance portfolio and fee income leaves a lot to be desired.

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Apr 15, 2015 (Close)


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