ING Vysya Bank: Signs of improvement

Performance summary

• Interest income grows 19% YoY in 1QFY09 on the back of 22% YoY growth in advances.

• Net interest margin improves to 2.8% in 1QFY09 from 2.7% in 1QFY08 due to higher proportion of CASA.

• Cost to income ratio declines significantly from 71% to 64% in the last 12 months.

• Bottomline grows 60% YoY including the impact of extraordinary income. Excluding the extraordinary item, 1QFY09 bottomline has grown by 74% YoY due to higher other income and lower operating costs.

• One of the lowest capital adequacy ratios of 10.4% at the end of 1QFY09, despite capital raising in FY08.

(Rs m)	1QFY08	1QFY09	Change
Interest income	4,015	4,783	19.1%
Interest Expense	2,976	3,204	7.7%
Net Interest Income	1,039	1,579	52.0%
Net interest margin (%)	2.7%	2.8%
Other Income	858	1,278	49.0%
Other Expense	1,344	1,819	35.3%
Provisions and contingencies	159	406	155.3%
Profit before tax	394	632	60.4%
Extraordinary items	20	-
Tax	160	226	41.3%
Profit after tax/ (loss)	254	406	59.9%
Net profit margin (%)	6.3%	8.5%
No. of shares (m)	91.3	102.8	102.8
Book value per share (Rs)*		153.3
P/BV (x)		1.7

*Book value as on 30th June 2008

What has driven performance in 1QFY09?

• Riding on the back of incremental accretion of low cost deposits, ING Vysya Bank managed to grow its advance book by 22% in 1QFY09, despite some shortage of capital. ING Vysya Bank raised capital to the tune of Rs 3.5 bn in 3QFY08, which improved the capital adequacy ratio of the bank from 10.7% to 12.2%. The CAR, however, stood at 10.4% at the end of 1QFY09 and may not support high growth rates for long. Nonetheless, 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 29.7% is also enthusing, which helped the bank improve its net interest margin (NIMs) to 2.8% (2.7% in 1QFY08).

  Focusing on cost

  (Rs m)	1QFY08	% of total	1QFY09	% of total	Change
  Advances	118,100		144,330		22.2%
  Deposits	164,870		203,810		23.6%
  CASA	45,010	27.3%	60,532	29.7%	34.5%
  Term deposits	119,860	72.7%	143,278	70.3%	19.5%
  C/D ratio	71.6%		70.8%

• 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 71% in 1QFY08 to 64% in 1QFY09. 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 1QFY09. The bank has also started providing for AS-15 on a pro-rata basis. ING Vysya has recently got RBI licences to open 56 new branches and 100 ATMs.

• The bank also managed to improve its asset quality both in absolute and percentage terms and maintained the net NPA level at 0.8% of advances (as was the case in 1QFY08).

• Other income for 1QFY09 registered a growth of 49% 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 first quarter of FY08 was due to profit on sale of a non-banking asset.

What to expect?

At the current price of Rs 255, the stock is trading at 1.4 times our estimated FY11 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 mended its ways over the past few quarters. Having said that, the lack of equity capital and the need for constant dilution gives us very little visibility into the future of the bank.