Mar 29, 2005|
ING Vysya: Banking on ING
Dismal performance for four consecutive quarters undoubtedly warrants some caution on the part of investors and in case of ING Vysya Bank, the poor streak shows no signs of abating. The bank had a successful rights issue in Feb 2005 at a record discount of 90% to the market price, wherein three shares of the bank were offered against each share held, at Rs 45 each. Although the rights issue amplified the net worth of the bank by 31%, the consecutive losses have created a dent on its reserves.
The bank has 40% of its credit exposure on the corporate side, while retail and SME segments occupy 20% each. While the retail segment has shown a robust 40% YoY growth during 9mFY05, the corporate segment lags behind with a growth rate of 30% YoY. In all fairness, these figures are comparable to most of its peers in the industry. The topline growth, has however, remained subdued due to a decline in yields (8.9% compared to 9.9% last year). Over the years, economizing on its cost of deposits, backed by a larger base of low cost deposits (23% of total deposits), has helped the bank considerably improve its NIM.
The picture however looks tainted, when we compare the net interest income (NII) to total advances. A declining trend of asset turnover ratio vindicates the fact that the bank has not been able to sufficiently optimize on its asset growth and the same has had an impact on its bottomline.While the net interest income (NII) has witnessed a CAGR of 13% over the last five years, the loan book has grown at a CAGR 17% of during the same period.
The prime cause that has hammered the bank's bottomline is however, the bank's other income side, particularly losses on the treasury side. Apart from trading losses, the bank also transferred securities worth Rs 7.1 bn from available-for-sale (AFS) category to held-to-maturity (HTM) category in 2QFY05, which entailed Rs 260 m provisioning for marked-to-market losses. At present approximately 45% of the assets are in the AFS category and are exposed to interest fluctuation risks. Resultantly, the non-interest income to total income ratio has dipped to 7% in FY05 as against 39% in FY04.
In terms of asset quality, the bank lags far behind its peers. With net NPA to advances ratio of 2.7% in 9mFY05 (no improvement over FY04), the bank is at the bottom of the league, especially amongst its private sector counterparts. The NPA coverage ratio of 33% is also well below the industry average of 60%.
At the current price of Rs 140 the stock is trading at 1.8 times its 9mFY05 adjusted book value. Despite factoring in the benefits of the rights issue, the current valuations of the bank are well above those desired. Even after the equity dilution, the poor quality of assets (net NPA per share Rs 28) has pruned the book value per share to Rs 107.
The only upside to the stock is a possible buyout by parent ING (which holds 44% stake in the bank). Here, it should be noted that ING will be allowed to take a controlling stake in the bank only post FY09 i.e. after the second phase of RBI's roadmap comes into practice. Thus, going forward if ING decides to consolidate its stake in the bank, it will augur well for the bank's growth prospects.
Having said that, with the additional capital infusion, the bank is well geared to accommodate a reasonable asset growth. Although further prudence in terms of asset quality, lower reliance on treasury income and a better asset turnover is warranted on the part of the bank, we believe, that improvisations on these fronts will garner better valuations to the bank in the long run.
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