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ING Vysya Bank: Little visibility
May 2, 2008

Performance summary
  • Interest income grows 33% YoY in FY08 on the back of 22% YoY growth in advances.
  • Net interest margin drops to 2.7% in FY08 from 3.2% in FY08 despite higher proportion of CASA.

  • Cost to income ratio declines from 72% in FY07 to 68% in FY08.

  • Bottomline grows 76% YoY including the impact of extraordinary income. Excluding the extraordinary item, FY08 bottomline has grown by 146% YoY due to higher other income and lower provisioning.

  • One of the lowest capital adequacy ratios of 10.2% at the end of FY08, despite capital raising in this fiscal.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Interest income 3,509 4,505 28.4% 12,676 16,804 32.6%
Interest Expense 2,352 3,100 31.8% 8,220 11,820 43.8%
Net Interest Income 1,157 1,405 21.4% 4,456 4,984 11.8%
Net interest margin (%)       3.2% 2.7%  
Other Income 919 1,185 28.9% 2,522 3,981 57.9%
Other Expense 1,321 1,714 29.8% 5,050 6,094 20.7%
Provisions and contingencies 453 221 -51.2% 986 560 -43.2%
Profit before tax 302 655 116.9% 942 2,311 145.3%
Extraordinary items - -   334 203 -39.2%
Tax 118 226 91.5% 387 945 144.2%
Profit after tax/ (loss) 184 429 133.2% 889 1,569 76.5%
Net profit margin (%) 5.2% 9.5%   7.0% 9.3%  
No. of shares (m)       91.2 102.8  
Book value per share (Rs)*         138.7  
P/BV (x)         2.3  
*Book value as on 31st March 2008

What has driven performance in FY08?
  • All but capital: Marginally outperforming our estimates for FY08, ING Vysya Bank managed to grow its advance book by 22% in FY08, with the help of capital raised in the later half of the fiscal. 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 31.5% is also enthusing. However, the bank has had to heavily leverage its equity capital to clock the said growth in asset book, as is evident from its low credit deposit (C/D) ratio. The capital adequacy ratio has also shrunk to 10.2% at the end of FY08, one of the lowest in the sector. Further, ING Vysya was not able to pass on the entire hike in cost of funding to its borrowers, thereby lowering its net interest margin (NIMs) to 2.7%.

    Leveraged growth…
    (Rs m) FY07 % of total FY08 % of total Change
    Advances 119,760   146,500   22.3%
    Deposits 154,190   204,980   32.9%
    CASA 44,580 28.9% 64,520 31.5% 44.7%
    Term deposits 109,610 71.1% 140,460 68.5% 28.1%
    C/D ratio 77.7%   71.5%    

  • 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 72% in FY07 to 68% in FY08. 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 49% of the bank’s operating costs in FY08. 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 FY08 registered a growth of 58% 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 319, 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 lower growth in this fiscal, although at the cost of margins. While ING has mended its performance over the past few quarters, the lack of equity capital and the need for constant dilution gives us very little visibility into the future of the bank.

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