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ING Vysya Bank: No show!
May 30, 2006

Performance summary
Although staging a turnaround from the losses of FY05, ING Vysya Bank showed very muted signs of growth in the fourth quarter and year ended March 2006. Grossly under performing our expectations, the bank continued to languish in losses in 4QFY06, although the full year numbers are positive due to lower impact of treasury losses. The growth in asset book is also below the industry average, while improvement in the fee income, provisioning and asset quality leave a lot is desired.

Rs (m) 4QFY05 4QFY06 Change FY05 FY06 Change
Income from operations 2,661 3,142 18.1% 9,905 12,224 23.4%
Other Income 664 437 -34.2% 1,226 1,903 55.2%
Interest Expense 1,765 1,813 2.7% 6,338 7,412 16.9%
Net Interest Income 896 1,329 48.3% 3,567 4,812 34.9%
Net interest margin (%)       3.1% 3.2%  
Other Expense 1,120 1,722 53.8% 3,801 5,187 36.5%
Provisions and contingencies 457 409 -10.6% 1,727 1,312 -24.0%
Profit before tax (17) (365)   (735) 216  
Tax (64) (118)   (353) 125  
Profit after tax/ (loss) 47 (247)   (382) 91  
Net profit margin (%) 1.8%       0.7%  
No. of shares (m)       22.7 90.7  
Diluted earnings per share (Rs)*         1.0  
P/E (x)         116.6  

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 bank's management brought about a turnaround of sorts in the functioning of the bank. However, the bank exhibited a very poor operational performance in FY05 and also lagged in terms of asset quality.

What has driven performance in 4QFY06?
Assets-lackadaisical growth: ING Vysya Bank, which showed a marked improvement in advance growth in FY05 (31% YoY), almost catching up with its peers in the sector, failed to show a similar performance in FY06 (13% YoY growth in advances). This is despite the fact that the bank was better capitalised post its rights issue in FY05. Although the bank has not divulged details regarding the growth of the retail, corporate and SME segments, our estimates show that the growth rate in each of these segments has nearly halved in FY06 as compared to what was clocked in FY05. The worst affected is the retail credit portfolio, which as it is, is approximately only 16% of the bank’s total advance book in FY06. This clearly highlights the bank’s geographic concentration in the south, which is posing a handicap to its growth prospects.

Growth crawling in…
(Rs m) FY05 % of total FY06 % of total Change
Advances 90,810   102,320   12.7%
Deposits 125,690   133,350   6.1%
CASA 30,464 24.2% 36,030 27.0% 18.3%
Term deposits 95,226 75.8% 97,320 73.0% 2.2%
C/D ratio 72.2%   76.7%    

It must however be acknowledged that despite the liquidity pressure in the banking sector, ING Vysya Bank was able to pare its deposit costs from 5% in FY05 to 4.9% in FY06. This has directly filtered into its net interest margins, which have also witnessed a 10 basis points expansion. Going forward, we do not see the trend continuing as CASA comprises only 34% of the total deposits (in FY06) and the interest costs on the high cost deposits and borrowing will be significantly margin depletive.

Other income – little upside: Although the fourth quarter was not profitable for the bank in terms of treasury operations (due to the rise in bond yields), the full year figures for growth in other income is certainly appreciable. Treasury operations showed a turnaround by recording a profit of Rs 200 m in FY06, compared to a loss of Rs 1.3 bn in FY05. Also, the provisioning for MTM (mark to market) losses were lower by 90% YoY in FY06. It may be recalled that with the sale of its entire 14.9% stake in ING Vysya Life Insurance to Gujarat Ambuja Cements (GACL), the bank had a one-off gain of Rs 229 m in 2QFY06. This alone comprised 12% of its other income in FY06. Other than this, the bank seems to be showing no momentum in terms of fee income growth, which is likely to prove detrimental to its profit margins going forward.

No cover: Although the bank’s net NPA to advance ratio has reduced to 1.8% in FY06 (from 2.1% in FY05), 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 almost zero NPA coverage and in the wake of increase in the 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.

Gains from sale of investments: Along with the divestment of stake in ING Vysya Life (profit of Rs 229 m), the bank has decided to sell its entire stake in ING Investment Management Company, which is currently classified as a ‘held-to-maturity’ investment in its books. The same is expected to yield treasury gains for the bank in FY07.

What to expect?
At the current price of Rs 117, the stock is trading at 1.3 times our estimated FY08 adjusted book value. While the bank is yet to get its act together in terms of accelerating its wholesale and retail lending operations, no proactiveness in hedging its treasury portfolio and safeguarding its asset quality (by providing for NPA coverage), also call for caution. Further inconsistencies in performance and limited geographical foray continue stress the bank’s valuations.

The capital adequacy ratio of 10.7%, though higher than that of FY05 (9%) is certainly not sufficient to fuel the bank’s future growth, more so since the bank needs to comply itself with Basel II compliances (due March 2007). Also, the bank continues to have the highest cost to income ratio (approximately 70% in FY06) in the sector, which is a drag on its bottomline.

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