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ING Vysya Bank: Cost efficiency does the trick - Views on News from Equitymaster

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ING Vysya Bank: Cost efficiency does the trick
May 2, 2012

ING Vysya Bank declared the results for fourth quarter and financial year 2011-12 (FY12). The bank has reported 20% YoY growth in net interest income for FY12 while net profits have grown by 43% YoY. Here is our analysis of the results.

Performance Summary
  • Interest income grows 20% YoY in FY12 backed by 22% YoY growth in advances.
  • Net interest margin remains stable at 3.3% in FY12, due to re-pricing of loans.
  • Cost to income ratio comes down to 59% in FY12 from 62% in FY11.
  • Bottomline grows 43% YoY in FY12 due to write back of loan loss provisioning.
  • Capital adequacy ratio (CAR) moves up from 12.9% in FY11 to 14.0% in FY12 due to capital raising through QIP to parent ING.
  • Board recommended dividend of Rs 4 per share (dividend yield 1.1%)


(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 7,769 10,614 36.6% 26,940 38,568 43.2%
Interest Expense 5,085 7,422 46.0% 16,875 26,484 56.9%
Net Interest Income 2,684 3,192 18.9% 10,065 12,084 20.1%
Net interest margin (%)       3.3% 3.3%  
Other Income 1,705 1,968 15.4% 6,549 6,697 2.3%
Other Expense 2,956 2,957 0.0% 10,260 11,102 8.2%
Provisions and contingencies 42 566 1247.6% 1,516 1,137 -25.0%
Profit before tax 1,391 1,637 17.7% 4,838 6,542 35.2%
Tax 476 363 -23.7% 1,652 1,978 19.7%
Profit after tax/ (loss) 915 1,274 39.2% 3,186 4,564 43.3%
Net profit margin (%) 11.8% 12.0%   11.8% 11.8%  
No. of shares (m)         150.1  
Book value per share (Rs)*         258.2  
P/BV (x)         1.4  
*Book value as on 31st March 2012

What has driven performance in FY12?
  • The growth in loan book and deposits for ING Vysya Bank in FY12, have been well in line with expectations, given the additional capital headroom. At 22% YoY growth in advances, the bank managed to outdo the sector average, albeit marginally. Also 81% of the retail loan book at the end of March 2012 was concentrated in mortgages. While the accretion of low cost deposits slowed down, the bank managed to avert the pressure on its net interest margins due to capital support (CAR) despite higher interest costs. Going forward peaking interest rates and capital headroom may offer the bank more scope for growth. The bank's proportion of CASA deposits dropped marginally to 24.2% in FY12 from 34.6% in FY11. As the bank grows its franchise and re-prices its assets, we expect them to bring in more long term stability in ING's margins.

    Steady pace of growth
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 240,600   292,470   21.6%
    Retail 84,210 35.0% 78,967 27.0% -6.2%
    Corporate 156,390 65.0% 213,503 73.0% 36.5%
    Deposits 301,940   351,950   16.6%
    CASA 104,471 34.6% 120,367 34.2% 15.2%
    Term deposits 197,469 65.4% 231,583 65.8% 17.3%
    C/D ratio 79.7%   83.1%    

  • 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 since FY10. In FY12 too, despite some expansion of franchise and employee base, the cost to income ratio improved to 59% from 62% in FY11. The same did boost profits in the past fiscal. However, one cannot ignore the fact that ING's cost to income ratio continues to stay well above that of private sector banks and some PSU banks.

  • ING Vysya has in the past few quarters also addressed its concerns with regard to its lower provision coverage. The bank's NPA coverage ratio has gone up from 83.4% (in FY11) to 90.7% in the past 12 months. While the net NPA level has come down to 0.2% from 0.4% in the past 12 months, the gross NPAs decreased from 2.3% of advances in FY11 to 1.9% of advances in FY12. The bank believes that most of the slippages that were coming from personal loans segment have now been curtailed. Although the write-backs have helped full year profits, the bank has been conservative in terms of provisioning during the fourth quarter (4QFY12).

  • The proportion of other income to total income has remained stagnant at 36% over the years and needs improvement to enhance the quality of earnings.

What to expect?
At the current price of Rs 372, the stock is trading at 1.3 times our estimated FY14 adjusted book value. While we are enthused by the bank's emphasis on cost reduction measures and margin sustainability, marginal deterioration in asset quality cannot be ruled out. Going forward however, ING Vysya Bank is expected to have a streamlined approach for the future growth of the bank. We retain our long term positive view on the stock.

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