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ING Vysya: Can it get over its capital crunch? - Views on News from Equitymaster
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ING Vysya: Can it get over its capital crunch?
Jul 24, 2009

Performance summary
  • Interest income grows 22% YoY in 1QFY10 on the back of 12% YoY growth in advances.
  • Net interest margin (NIM) improves marginally from 2.8% in 1QFY09 to 2.9% in 1QFY10 due to higher proportion of CASA (current and savings accounts).
  • Cost to income ratio declines from 63% to 57% in the last 12 months.
  • Bottomline grows 49% YoY in 1QFY10 thanks to better margins.
  • Relatively low capital adequacy ratio of 12.2% at the end of 1QFY10.
  • Gross and net NPAs rise to 2% and 1.3% respectively at the end of 1QFY10.


Rs(m) 1QFY09 1QFY10 Change
Interest income 4,784 5,831 21.9%
Interest Expense 3,204 4,112 28.3%
Net Interest Income 1,580 1,719 8.8%
NIM (%) 2.8% 2.9%  
Other Income 1,278 1,597 25.0%
Other Expense 1,812 1,894 4.5%
Provisions and contingencies 414 487 17.6%
Profit before tax 632 935 47.9%
Tax 226 332 46.9%
Profit after tax / (loss) 406 603 48.5%
Net profit margin (%) 8.5% 10.3%  
No. of shares (m)   102.6  
Book value per share (Rs)*   161.3  
P/BV (x)   1.3  
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • Despite some additional headroom in terms of capital (capital adequacy ratio or CAR at 12.2% as compared to 10.4% in 1QFY09) ING Vysya Bank continued to remain one with the lowest CAR in the sector and this handicapped its growth. A relatively higher proportion of low cost deposits (CASA), however, enabled it to improve its NIM despite largely relying on growth of term deposits. The bank had divulged that at the end of FY09 that around 57% of its advances were towards retail loans (of which 65% to 70% were home loans), while large corporate and SME assets together comprised 43%. The bank has managed to improve the proportion of CASA deposits from 30% in 1QFY09 to 35% in 1QFY10.

    Growth still deprived of CASA
      1QFY09 % of total 1QFY10 % of total Change
    Advances 144,329   161,487   11.9%
               
    Deposits 203,805   226,083   10.9%
    CASA 60,562 29.7% 65,016 34.9% 7.4%
    Term deposits 143,243 70.3% 161,067 71.2% 12.4%
    C/D ratio 71%   71%    

  • 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 63% in 1QFY09 to 57% in 1QFY10. The same, however, continues to stay well above that of private sector banks and some PSU banks. ING Vysya expects this ratio to stabilize at mid-50% levels in the next few years. 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. It has opened 44 branches and 141 ATMs in the past 12 months.

  • ING Vysya, however, failed to contain additional slippages in its asset book over the last few quarters as the NPAs, both at gross and net levels increased marginally. While the gross NPAs increased from 1.6% of advances in 1QFY09 to 2.0% of advances in 1QFY10, net NPAs increased from 0.8% to 1.3%.

  • Higher treasury gains boosted the bank’s other income which grew by 25% YoY this quarter and largely supported its bottomline growth.

  • Although the concerns with regard to the shortage of capital for the bank were partially addressed in 2HFY09, it continues to remain handicapped in terms of CAR to sustain an accelerated growth pace even if the economic scenario improves. Thus, the bank may have to dilute equity in the medium term to sustain its growth rates. Its return on equity (ROE) meanwhile has improved from 10.5% in 1QFY09 to 13.9% in 1QFY10.

What to expect?
At the current price of Rs 208, the stock is trading at 1.1 times our estimated FY11 adjusted book value. ING Vysya Bank continues to have the highest cost to income ratio, which is a drag on its bottomline. Despite higher provisioning, the bank seems to have been inept at containing incremental slippages in the past few quarters. As such, despite relatively improved visibility into the future of ING Vysya and fair valuations, we remain concerned about the long term prospects of the bank.

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